Buying a home will likely be the single biggest purchase you’ll make, and first-time buyers are being urged to do their research before hitting the streets.
Here are three things to avoid when it comes to the finances of purchasing your first property:
1. Falling short on the deposit
A 10 percent deposit really isn’t enough these days – if possible, you should aim for 20 percent, said Sally Tindall, spokeswoman for RateCity.
10% deposit home loans
“10 percent deposit home loans are available on RateCity website, however it is worth comparing them to 20 percent deposit mortgages”
A deposit of 20 percent offers three big advantages. First, your interest charges are lower, simply because you borrow less to begin with, she said.
For a property worth $400,000, a 20 percent deposit means taking out a mortgage of $320,000, while a 10 percent deposit means a mortgage of $360,000, assuming you’ve paid lenders mortgage insurance separately.
“That’s $133 extra a month in interest charges that you’re effectively handing straight to your bank,” she said.
20% deposit home loans
Second, you’re less likely to pay a large cost called lenders mortgage insurance (LMI), she said.
Estimated LMI on a $400,000 mortgage with a $40,000 deposit, based on the RateCity LMI Calculator
“Most lenders will insist on this insurance if you’re borrowing more than 80 percent of the property’s value. It’s a one-time cost, but generally gets rolled into your debt, so could add thousands to the amount you owe,” she said. “A deposit of 20 percent should see you clear of any requirement for LMI.”
Finally, it’s possible you’ll pay a lower interest rate or fees overall.
Monthly repayments 20% deposit vs. 10% deposit
“Many lenders tier their interest rates based on the deposit you’ve got; it’s definitely worth negotiating for better deal if you’ve got a higher deposit.”
2. Not allowing for a repayment buffer
Lenders will look at your capacity to meet monthly repayments by examining your post-tax income and your other commitments. They will also most likely test your capacity to pay if interest rates go up by 2 or 3 per cent.
This is what is called the “repayment buffer”, and you should do your budgeting using an interest rate that’s at least 2 percentage points higher than current rates.
Wayne Stewart, from the Real Estate Institute of NSW said:
“When interest rates are low they can only go in one direction and that is upward, so you should always take into consideration with your due diligence and extra couple of percentage points for when interest rates do go up you can plan forward.”
Imagine you took out a $350,000 loan with a variable interest rate of 4 per cent. In 2 years time, that rate could rise to 6 per cent, which means you have to pay over $400 extra in monthly repayments, just 24 months after you took out the loan.
“If you hadn’t budgeted for that, you’d be joining the growing ranks of people who are falling behind on their mortgage payments,” said Tindall.
“Even if rates don’t rise, if you’ve got that buffer, you’re then in a position to increase your repayments voluntarily.”
3. Letting emotions get in the way
When you’re looking at your dream home, it’s hard to stop and think about the costs over the next 20 or 30 years.
But doing the calculations and understanding what you can afford is vital before you even start looking at possible homes, insists Tindall.
“First home buyers need to be cautious about sticking to their budgets and doing their research before hitting the streets. Shop around using sites like RateCity and compare home loan costs over the long term,” she said.
“My final piece of advice is not to ‘set and forget’. Don’t just stay with your current institution, compare mortgages online and be ready to haggle.”